Limits to Lending

On July 1, Arizona's payday-loan industry will no longer be legal

On July 1, payday-loan shops will either disappear or find new ways to stay in business.

A small, handwritten sign posted inside of a business on South Sixth Avenue announces a coming change—at least to customers who are paying close attention.

After stating that payday loans will no longer be available after the end of the month, it proclaims: "Beginning July 1, we will be offering 'registration' loans!!"

Opponents of the payday-loan industry believe the same thing will happen at a number of Tucson's 90 or so businesses that presently offer the high-interest-rate loans.

Representatives of four payday-lending companies, plus a national spokesman for the industry, didn't respond to requests for comment. Opponents of the industry, though, were happy to give their side and predict what the future will bring.

"Some of the stores will go away, right away," says David Higuera, of Arizonans for Responsible Lending, "but others will hang on."

Higuera thinks the businesses that remain will provide other services, such as alternative high-interest-rate loans, including auto-title loans. However, he notes that auto-title loans are already offered by some Tucson businesses.

Another important distinction between auto-title and payday loans, Higuera says, is how they are secured.

"I believe people will be more hesitant to put their car on the line than a check," he states.

Jean Ann Fox, director of the Consumer Federation of America, says that because a vehicle must usually be paid off for an owner to get an auto-title loan, "there's a smaller (customer) population for these loans, and they're off-limits to the military."

Nationally, "auto-title loans average about $300," Fox says, "and the loan is paid in full at the end of the month. If it isn't paid, the car is towed."

Arizona law, Fox says, allows companies offering auto-title loans of $500 or less to charge up to a 204 percent annual interest rate; loans between $500 and $2,500 can be charged an interest rate of up to 180 percent.

That may sound like a lot, especially considering that an annual interest rate cap of 36 percent limits many loans in Arizona. But that high figure is nothing when compared to the interest rates charged by the payday-loan industry.

A decade ago, the state Legislature exempted payday loans of $500 or less from the maximum cap, allowing an annual interest rate of more than 450 percent to be charged. In response, payday-loan establishments sprang up by the hundreds in storefronts across the state. By 2008, according to Higuera, there were 110 in Pima County alone.

The Legislature, however, placed a 10-year sunset clause in the exemption law, meaning the payday-loan industry would expire in 2010 unless it got an extension.

Two years ago, payday-loan companies poured $14 million into a ballot initiative and a corresponding campaign to convince Arizonans that the industry had merits. However, the attempt at a continuation was crushed at the polls.

Payday-loan lobbyists then tried to get this year's Legislature to grant a last-minute reprieve, but that effort also failed.

"That was a bipartisan rejection," Higuera says of a Legislature not usually known for cross-party cooperation.

Higuera says the almost-all-volunteer effort to end the payday-loan exemption is a major accomplishment.

"It showed that grassroots activism still works," he says. "There are a lot of people interested in seeing the end of this predatory lending."

However, it wouldn't surprise Higuera if lobbyists made another attempt to revive the industry next year. In an e-mail, he writes that in 2008, Tucson's payday-loan businesses "were doing a combined $130.7 million in loan volume. Of that, we can estimate that $99.3 million of that was based on churning loans to repeat borrowers."

Churned loans, Higuera says, represent 76 percent of the payday-loan volume: These loans are made to borrowers "who have to take out another payday loan before their next pay period after 'paying off' a previous payday loan. In other words, the industry's entire business model is based on the trapped borrower."

After July 1, however, those loans will no longer be legal. To ensure the loans are no longer being made, Arizona Attorney General Terry Goddard, who is running for governor, launched Operation Sunset last week.

As part of his office's effort, Goddard sent out a letter to the industry, saying: "Be advised that I intend to use every available legal tool to enforce the sunset of payday loans in Arizona."

While payday-loan stores may try to change the types of loans they offer in an effort to stay in business, Higuera doesn't think those efforts will succeed.

"Within 18 months, I anticipate the majority (of payday-loan businesses) will have closed, because payday loans were their cash cow," he predicts.

The disappearance of these loans won't bother Jimmy Estrada. As he left a store last week that offers payday loans in addition a number of other services, he acknowledged that because of a family crisis, he once obtained a payday loan.